The financial system has evolved over the years and the traditional methods of borrowing against securities, such as collateralized loans, are no longer as popular. Investors are now turning to more innovative ways of borrowing, such as a loan against mutual funds.
In India, the National Securities Depository Limited (NSDL) has launched a new facility for investors who want to borrow against their mutual fund units. This facility is generally available at an interest rate of 12-16% per annum, subject to the lender chosen and the EMI plan taken.
The borrower can use this facility for a period of up to one year and can also renew it after that period if they want to. This is a practical choice for investors because it helps them manage their cash flows better and also improves liquidity.
Reasons that make the loan against mutual funds a pragmatic choice for investors
- Fast processing & easy availability
A loan against mutual funds is an easier way to avail of the quick capital one needs. Applying for loans like this is quick and easy as it requires no hefty documentation and weeks of waiting for approval, thanks to the online footprints of Banks/NBFCs.
Today, most financial institutions, including Abhi Loans, have a digital presence. With that being the case, borrowers need not visit the lending institution to apply for the loan. The online, paperless application process makes approval possible to obtain the loan within hours. For a four-hour disbursal, you may borrow from Abhi Loans, a leading NBFC. Here, you need to submit only KYC documents in the name of documentation.
- Lower interest rates
A loan against securities is a type of loan secured by collateral, such as equity shares, stock, bonds, mutual fund holdings, insurance policies, etc. That is why the interest rates on such a loan are lower than on personal and credit card loans. Although the interest rate (IR) is cheaper, it may vary from lender to lender.
While the IR on a personal loan can go up to 24% per annum or higher with some lenders, it is relatively low on a loan against securities, ranging from 12-16%, depending on the lender you choose and the EMI plan you take.
- No negative impact on your portfolio
MF investors tend to have medium-to-long-term financial goals. With that being a fact, selling off or redeeming MF units to meet the impulsive need for funds may block the road to fulfilling those goals. That is where a loan against mutual funds becomes more practical than liquidating your MF units.
A loan against stocks comes with minimal or no risk for the lender as the collateral secures the loan. If paid back successfully within the time given, it has no adverse effect on the borrowers’ portfolio either. Since borrowers retain the ownership of their investment even while pledging their MF units, they continue to earn dividends and profits. As a result, their long-term financial goals and growth prospects remain unobstructed.
- A less costly borrowing option
If the reasons above fall insufficient to make a loan against mutual funds a practical choice, here is more. Costs or processing fees to a loan against mutual funds or other financial securities are reasonably low. And if you borrow money from Abhi Loans, it could be as low as 2% of the loan amount + GST.
Abhi Loans, a trustworthy NBFC, imposes no hidden charges on loans against shares and mutual funds. As for the prepayment charges, some lenders include them in the loan agreement while others do not. That given, the loan against mutual funds is wiser and more advantageous than selling off your MF units when you need urgent funds.